Save on 2012 taxes with RMDs, but act PDQ

Joe Lucey, CFP, RFC, is a Certified Financial Planner and Registered
Financial Consultant, and president of Minneapolis-based Secured Retirement
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Qualified charitable distributions (QCD's) are back. Solid planning for retirees may allow them the ability to go back and reduce their 2012 taxes using this strategy, but they need to be done PDQ (Pretty Darn Quick)!

Congress passed the American Taxpayer Relief Act of 2012 (ATRA) early this year which preserves many of the Bush era tax provisions, patching the AMT, and avoiding, or delaying, the "fiscal cliff". The Bill also renewed popular QCD tax-break provisions, but only in 2012 and 2013. Leave it to Congress to pass a law in 2013 affecting 2012 tax returns. While this tax break applies only to IRA owners taking Required minimum distributions (RMD), those retirees who can use it can get a nice tax break.

RMDs often create extra taxation on those over the age 70 1/2 who must take unwanted taxable income from IRAs. The QCD allows an IRA owner to satisfy all or part of these RMDs tax-free if they transfer funds directly to a qualified charity. Individuals may even contribute more than their RMD's to charity, should they choose.

The main advantage of a QCD versus an after RMD distribution to charity is that the QCD removes "above the line" income which can increase deductions, avoid increased Medicare premium and in some cases, reduce state taxes, reduce future IRA withdrawal requirements and potentially reduce the size of a taxable estate. To qualify, the owner or beneficiary of an IRA must be age 70 1/2 or older, and the combined annual charitable contribution is capped at $100,000 per year, per person. No carry-overs and you do not recognize the gift as an itemized deduction.

This year's American Taxpayer Relief Act creates a special short term opportunity, known as "IRA Charitable Rollover.” The opportunity allows someone to treat a contribution made to a qualified charity in January 2013 as a 2012 QCD by directly transferring a contribution to a charity from an IRA. However, if you satisfied your RMD distribution in December 2012, it can be treated as a QCD if you make a corresponding cash contribution to an eligible charity before Jan. 31, 2013.

Doing so allows the unique opportunity to make QCDs past the normal year-end deadline and apply them retroactively against last year's $100,000 limit. For families who qualify, and act within the next few days, they can still take advantage of a 2012 QCD provided that they write a check up to the amount of their RMD withdrawn in 2012 to a charity by Jan. 31, 2013. In fact, some astute retirees will likely combine last year's RMD taken in December with an additional charitable grant, up the combined $100,000 maximum, reducing future year taxable RMD's.

Consider a QCD if you are required to take RMD withdrawals from your IRA and will pay tax on unnecessary income, or file a standard deduction and do not receive the charitable write off.

For example, imagine a retiree who is required to take $12,000 in 2012 RMD's from an IRA, satisfied in December. The individual plans to contribute $1,000 per month to their church this year. If they act before the end of the month, they can write a check in the amount of last December's RMD to the charity, and the result is a reduction of last year's taxable income of the entire gift. This could increase deductions allowed because of a lower adjustable gross income or provide a retiree that files standard deduction recognition of the grant. Additionally, it is an advantage for taxpayers unable to write off a full charitable contribution which exceed 50% of their adjusted gross income and residents in states that do not have a state income tax charitable deduction.

Remain cautious however. Receiving the QCD benefit only applies to funds given directly to qualified charities and not towards grants made to foundations, donor advised funds or charitable gift annuities. Furthermore, while the QCD provides for gifts to charities in 2013, grants given this year will need to be transferred directly from your qualified account. Writing a check from your bank account to offset the earlier receipt of the RMD into your bank will not work.

IRA owners should consider these new QCD provisions when deciding on their financial future. Reporting the QCD can be a bit tricky, especially with the new twists only available retroactively to 2012. Take time to keep solid records to prove any qualified charitable contribution made this month for last year and consult with a professional first.

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